30-12-2016

Themes to watch in 2017 for the Asia thermal coal market

TCP

Volatility is the watchword for the thermal coal market in 2017 following a turbulent 2016 when Beijing’s self-imposed production constraints fuelled a massive rise in thermal coal prices right across the Asian seaborne market in the second half of 2016.

As has been the pattern for the past several years, China — or more specifically the actions and influence of its central government — has been a strong deciding factor in the direction of the Asian market.

Standout examples over the recent years include its quickly implemented import tax, its trace elements testing procedure reserved for import cargoes that still stands, and of course its decision to limit domestic mines to 276 days of production in a year.

CHINA, THE X-FACTOR

With its track record, Beijing could perhaps be described as the Asian thermal coal market’s X-factor, or wild card.

Second-guessing the next steps of China’s central government will therefore be a major game plan of many Asia-Pacific market participants.

Price stability appears to be an overriding concern for central government policymakers, who are keen to avoid large rises or falls in prices for domestic thermal coal, in other words price volatility.

There are already signs that mine-gate prices are again rising in China, potentially setting the stage for more market interventions by Beijing in 2017.

EARLY TEST

An early test of Beijing’s intentions will come early on in the new year with the fate of its import tax.

Beijing is set to lift its 2% import duty on Australian thermal coal on January 1, 2017, as it keeps to its side of the China-Australia Free Trade Agreement.

The duty has weighed on Australian cargo prices in the Chinese seaborne market for the past three years, and the Australian government has said it is confident the tax will go.

PORTFOLIO DIVERSIFICATION

One important side effect of 2016’s market turbulence is that it has brought on a determination by Asian thermal coal buyers to diversify their supply sources away from Australia and Indonesia. This could be another theme to unfold in 2017.

The coming together of EDF Trading expertise and the buying power of Chubu Electric and Tokyo Electric in the JERA joint venture with its global reach has opened up possible new trade routes for thermal coal into East Asia in 2017.

Colombian thermal coal could in theory travel through the now enlarged Panama Canal, creating a new trans-Pacific route that could practically halve sailing times on the traditional Atlantic to Pacific route.

There are two drawbacks to shippers using the Panama Canal for thermal coal traffic if they choose the shorter trans-Pacific route.

Firstly, shippers would have to pay Panama Canal fees which amount to around $300,000 for a Capesize ship.

Secondly, due to the canal’s draft restrictions, only partially laden Capesize vessels can traverse the waterway, sources said.

MOZAMBIQUE TRADE

Another potential new trade route could include Mozambique, a relative newcomer to the seaborne thermal coal market.

Shipowners have seen an expansion of trade into the African country, and are keen to find Mozambique cargoes to haul back to Asia which might include thermal coal shipments, sources said.

Vessel owners are understood to be willing to reposition ships for use on the Mozambique trade route to Asia, and this could be a significant market development in 2017, sources said.

There is growing market talk that Japanese buyers may have received competitively priced offers of Mozambique thermal coal, after test cargoes were sent to power plants in Europe and India in 2016.

Blending might be an option for East Asian buyers seeking to diversify their portfolio of fuel sources with non-traditional origins of thermal coal such as from Mozambique, sources suggested.

PRODUCERS’ RESPONSE

Price volatility has also triggered a response in some thermal coal producers as they try to manage quick-changing price expectations among buyers.

Some mid-tier Australian coal producers are understood to have adopted a more cautious approach of offering fewer spot cargoes into the forward trading space in a bid to draw out buyers, sources said.

Larger Australian producers have benefited from a strong recovery in metallurgical coal prices, and thermal coal sales have taken on a secondary importance for them. This focus may continue into the new year, depending on the length of time that the recovery lingers.

More US thermal coal could be seen arriving on Asia’s eastern shores in 2017, as US coal producers recover from a devastating domestic market depression that sent several miners into insolvency.

Russian eastern exports are constrained to some degree by existing infrastructure corridors and port capacity on the country’s Pacific seaboard.

In conclusion, one certainty for the 2017 year is that the seaborne thermal coal market will continue to develop, possibly in surprising ways, and that China has the potential to cause more upsets and volatility.

Source: Platts 

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